Following the latest circulars of the ISA staff, the impacts of the new regulation on the status of foreign firms approaching Israeli clients is now clear. The aim is to allow local traders to legally open accounts only with firms holding an Israeli license. Therefore, if an international broker is willing to accept Israeli residents, it has to be regulated in Israel. This requirement is meant to protect Israeli traders but is also a relief for local brokers who feared that the law will drive their clients abroad.

Onshoring Operations

The Israeli watchdog completely ignores the status of foreign licenses held by brokers. This means that FCA or CySEC licensed firms will not be able to passport their licenses as they commonly do in Europe or market based on the credibility it brings as they used to do in Israel until now.

This also presents an opportunity for previously unregulated offshore brokers targeting Israeli clients as the ISA now allows unregulated companies from BVI and anywhere else to transition their operation into a regulated Israeli firm. Indeed, many of the brokers who applied for an ISA license stated a regulated or non-regulated affiliated company that transferred its client base to the new applicant broker.

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One demand the applicant is sure to hate is the “matching principle.” According to this rule, when a client deposits a certain amount with a broker, the broker now must cover itself 1:1 with its own money with a liquidity provider. This will require large amounts of private capital from the brokers and can seem excessive.

Details on MT4 Management

Another interesting aspect of the law is the request of the regulators to supply detailed white papers on the core technology, including specific technical material. This demand is unheard of in similar processes for obtaining licenses in other jurisdictions around the world, according to a lawyer who handles such affairs.

Advocate and Notary Tal Itzhak Ron from Tal Ron, Drihem & Co. revealed to Finance Magnates he received material from technology providers MetaQuotes Software Corp, Inc., and Panda Trading Systems, Ltd, for incorporation in the relevant applications of local brokers. Some of this data had indeed included very technical details which the regulator demanded.

While it is applaudable that the regulator wishes to protect local traders as best it can, it remains to be seen if the ISA staff really possesses the technical experience needed to understand how every piece of brokerage management software works.

All of the applications prepared with Ron also contained a sample of employment contracts drafts, even though the regulator did not ask for it explicitly. The regulator wishes to see that the employees are not incentivized for promoting certain trades and creating conflicts of interests with their clients, hence the submission.

The requirement for detailed white papers on IT is not unique to Israel.

The FCA can require (for certain firms) a “Detailed IT Controls Form” which asks searching questions about IT management, governance, security, IT risk mitigation, code update procedures etc. This practice has been in place for years.

Management are not expected to know how everything works in detail (that is for IT staff) but they should have a good understanding of what is being done in their name by their IT departments/suppliers. This is, after all, a predominantly IT led industry.